Philippines’ Attrition is Spiking – Is Latin America Next?

High employee turnover is something that sourcing managers have learned to put up with when offshoring IT and BPO tasks to India. But now the Philippines has also begun showing signs of overheating. Given Latin America’s relatively small labor pools, we worry that the region might follow suit and succumb to the same pressures that have pushed the Philippines to its limits. So far, rampant turnover has not been a major problem with LatAm markets. But just in case, we decided to take another look at some of the details around attrition and other symptoms of hot labor market conditions.

What we found is that while Latin American labor pools are fewer and often smaller, sound management practices at the company level, greater company loyalty, and slower, more organic industry growth have kept attrition rates lower than what has been seen in both India and the Philippines.

What’s Up with the Philippines?

“BPO firms [in the Philippines] are experiencing difficulty in hiring and retaining “capable employees,” thus, resulting in higher attrition rates and an increase in hiring and retention costs,” noted global consulting firm Tholons in a recent report. Other sources suggest that up to 75 percent of the Philippine people speak good English, so it’s no surprise that the BPO industry (in revenues) has been growing at 20 percent annually. Market research firm XMG Global also expressed concern over the growing “talent problem” in the Philippines – not only with today’s labor force, but also with high dropout rates in the labor pipeline in primary and secondary school. As a result of this and other factors, labor costs are expected to go up by 25-60 percent over the next five years.

Despite these warning signs, the Business Process Outsourcing Association of the Philippines, in a joint report with Everest Research, anticipates the industry to almost double by 2016 to 900,000 employees. For those service providers already battling it out with runaway training and recruitment costs, wage inflation, disrupted project workflows, and inconsistency in service level quality, those projections may be a hard pill to swallow.

LatAm Sensitivity to Demand Pressures

When it comes to contact centers and BPO, English-speaking labor pools in Latin America are relatively small and hence tend to be more susceptible to demand and supply misalignment. Central American countries are a case in point as is currently being witnessed in Guatemala, where a growing price war for bilingual agents is forcing companies like 24/7 Customer to diversify their coverage base into Nicaragua. Going forward, as even smaller markets like Belize and Honduras grow into the BPO industry, service providers should take care not to over promise and under deliver on total cost and service level agreements. Likewise, government officials should be careful not to ‘over promote’ their regions’ capabilities, without backing up their initiatives with matching training and education dollars.

Concern over employee churn also has a lot to do with the type of business that you’re in. According to Tony Mataya from Think Solutions, on the whole, Mexico’s IT services industry has not seen the type of attrition rates experienced in India. Chris Snyder CIO of Hulcher also said that it has a lot to do with the fact that just like Americans, “Indians don’t want to work the third shift if they don’t have to” – referring to the 12-hour time zone gab between the US and India. This is particularly true when dealing with agile, scrum and other live-time software development methodologies. “We tried agile with India, but turnover got to the point of ridiculousness.” Snyder also noted that they’ve had much better luck in Brazil, although they’ve found it increasingly difficult to retain and recruit talent since signing on with Stefanini Solutions three years ago.

Market Fundamentals: Mexico vs. India vs. the Philippines

When looking at macro-level data there are a couple of things to be mindful of when analyzing labor markets. Consumer price inflation is perhaps the most indicative of rising wages, since employers typically need to adjust salaries annually in line with overall inflation. Below we see that the cost of living has more than doubled in India over the last five years, while Mexico and the Philippines have seen lower inflation year on year. GDP per capita is clearly much higher in Mexico, which puts a premium on wages. Likewise sheer market size in terms of population emphasizes India’s dominance as an offshore hub to both Mexico and the Philippines.

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Attrition Boils Down to Economics, Management, Culture

Personal expectations and the promise of higher wages is what ultimately cause BPO employees to jump ship. However, work culture and company management style also has a lot to do with it. Eric Simonson Director of research at Everest pointed out that “the Indian work mentality is focused more heavily on ‘getting ahead’, rather than subject matter expertise. We’ve seen good things coming out of Poland lately partly because the work culture follows a more artisanal approach focused on mastery and domain expertise.” Mataya from Think Solutions also backed up this claim and mentioned that it is “not uncommon to see BPO workers in India move companies for ten cent raises”.

3 comments

"Consumer price inflation is perhaps the most indicative of rising wages, since employers typically need to adjust salaries annually in line with overall inflation. Below we see that the cost of living has more than doubled in India over the last five years, while Mexico and the Philippines have seen lower inflation year on year."

It is true that Mexico has low inflation and wages are correlated to the cost of living, but there are two problems: (1) Mexico is a petroleum exporting nation. This tends to strengthen the national currency which harms other export industries, including software. (2) Mexico has a history of overvaluing its currency in order to offset the inflationary effects of populist policies. Thus the cost of living in Mexico City and Monterrey is quite high in dollar terms.

Shameless plug for Veracruz (where we hire programmers): I look forward to the day when U.S. and Canadian outsourcers discover the Mexican provinces where the cost of living is low in dollar terms. We Jarochos have more shallow IT labor markets than the Capitolinos or the Regios, but our low cost of living can compete with the Asians.

"Cant speak for Latin America but after reading the article I have lived thru it in the Philippines, Caribbean and in India. All very true. Well done adding more insight to the economic dynamics in play to understand more why now and what to expect in the future.

From personal experience in India working strictly the 3rd shift I have found in order to curb attrition I had to hire the right ones very carefully and took more of an organic approach to lower my attrition rates.
– look and weigh closely the candidates proximity to the job and their means of transportation.
– Is where they are coming from under heavy construction or have ample access to rickshaws / public transportation? Own transportation?
– What are the increased traveling times during Monsoon season?
– What are their family obligations during the daylight and / or off business hours?

You also really have to dissect the behavioral attributes when it comes to assessing their aspirations in terms of salary or simply their designation or job title. I can see people leaving a job for a 10 cent increase because their designation / title has more weight to it it versus their current one. Determining the balance between the two needs to be fleshed out to minimize the risk of attrition in India. Its really a different balance in those terms in India versus other parts of the globe.

Critical thinking exercises is also key to finding the right rep. I would ask a few questions to gauge their thought process and how they express their thoughts as it would relate to conversing with Americans. Sentence framing, voice and accent, and intonation I weighed heavily on when finding the best fits to my collection processes. Simply having confidence and conviction in their tone is not enough. Looking at their thought process and critical thinking skills and the way they deliver their answers was something I closely gauged.

The one point I would make that the article didn't touch upon would be the show rates and the things that affect them. This too needs to be assessed and gauged carefully as poor show rates can be a revenue and production killer when hiring reps. Are they still in school? Do they plan on going back to school? Do they have family obligations such as caring for a sick / needy relative or their family business? Show rates in my opinion is the first indication that attrition is eminent or that you have hired the right people for your process no matter what the economic climate dynamic presents.

In the Philippines much is similar there as in India in terms of transportation but I presume since the rapid growth of more call centers those folks have the ability to do more window shopping and put more on the wage versus title / designation from my experience. In either case you really have to be in tune to their cultural behaviors and challenges to the positions you are trying to fill. Reading between the lines and asking probing questions that indicate their work ethic and aspirations is a skill in itself. Oddly enough in the ARM sector I have had better success in curbing attrition and improving show rates by hiring and screening applicants myself versus relying on our partner's and/or local HR – Recruitment Dept's. The key for any Expat is truly understanding the culture, asking the right questions and weighing their responses as it all relates to your programs. Mastering these principles can help mitigate the changing economic dynamics that give rise to attrition and show rate fluctuations in my experience. Although I have never done business in Latin America, I have found that my approach in the Caribbean, India, Philippines, and as an America doing business abroad you have to be skilled in understanding their culture as it relates to partnering with yours when choosing the right candidates from large pools of applicants.

Very interesting article and a great post Patrick. Interested in what others think and do in their respective processes around the globe".

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